Filed On 8/29/08 3:53pm ET · SEC File 5-83114 · Accession Number 919574-8-4993
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
8/29/08 Cobalt Capital Management Inc SC 13D/A 1:8 Horsehead Holding Corp Seward & Kissel/FA
Amendment to General Statement of Beneficial Ownership · Schedule 13D
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SC 13D/A Amendment to General Statement of Beneficial 8 34K
Ownership
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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SCHEDULE 13D
(Rule 13d-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
RULE 13d-2(a)
(Amendment No. 1)
Horsehead Holding Corp.
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(Name of Issuer)
Common Stock, par value $0.01 per share
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(Title of Class of Securities)
440694305
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(CUSIP Number)
Wayne Cooperman
c/o Cobalt Capital Management Inc.
237 Park Avenue
Suite 900
New York, New York 10017
212-808-3756
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(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
August 27, 2008
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(Date of Event which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition that is the subject of this Schedule 13D, and is filing
this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the
following box [X].
CUSIP No. 440694305
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1. NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Cobalt Capital Management Inc. (1)
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [_]
(b) [x]
3. SEC USE ONLY
4. SOURCE OF FUNDS
AF, WC
5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) OR 2(e) [_]
6. CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware, United States
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON
7. SOLE VOTING POWER
0
8. SHARED VOTING POWER
2,365,239
9. SOLE DISPOSITIVE POWER
0
10. SHARED DISPOSITIVE POWER
2,365,239
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
2,365,239
12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
6.72%
14. TYPE OF REPORTING PERSON
CO
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(1) The securities reported herein are held by Cobalt Offshore Fund Limited;
Cobalt Partners, L.P.; Cobalt Partners II, L.P. and other separately
managed accounts.
CUSIP No. 440694305
---------
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Item 1. Security and Issuer.
The name of the issuer is the Horsehead Holding Corp., a Delaware
corporation (the "Issuer"). The address of the Issuer's offices is 300 Frankfort
Road, Monaca, Pennsylvania 15061. This schedule relates to the Issuer's Common
Stock, par value $0.01 per share (the "Shares").
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Item 2. Identity and Background.
(a-c,f) This Schedule 13D is being filed by Cobalt Capital Management Inc., a
U.S. corporation (the "Reporting Person"). The principal business address of the
Reporting Person is 237 Park Avenue, Suite 900, New York, New York 10017, United
States of America.
(d) None of the persons identified in this Item 2 have, during the last
five years, been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors).
(e) None of the persons identified in this Item 2 have, during the last
five years, been a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding were or are
subject to a judgement, decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to, Federal or state securities laws
or finding any violation with respect to such laws.
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Item 3. Source and Amount of Funds or Other Consideration.
The amount of funds used to purchases the 2,365,239 Shares beneficially
owned by the Reporting Person was $31,847,826. The source of the funds used for
the purchase of such Shares was the Reporting Person's working capital and/or
its affiliated funds.
No borrowed funds were used to purchase the Shares, other than any borrowed
funds used for working capital purposes in the ordinary course of business
including leverage.
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Item 4. Purpose of Transaction.
The purpose of this Amendment 1 to Schedule 13D is to report that on August
27, 2008 the Reporting Person mailed a letter to the Issuer setting forth the
Reporting Person's view on certain matters of business related to the Issuer.
Such letter is attached hereto as Exhibit B. There are no other changes to the
information filed in the Schedule 13D on August 20, 2008.
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Item 5. Interest in Securities of the Issuer.
As of the date hereof, Cobalt Capital Management Inc. may be deemed to be
the beneficial owner of 2,365,239 Shares, or 6.72% of the Shares of the Issuer,
based upon the 35,194,207 Shares outstanding as of July 28, 2008, according to
the Issuer's most recent Form 10-Q.
Cobalt Capital Management Inc. has the sole power to vote or direct the
vote of 0 Shares to which this filing relates.
Cobalt Capital Management Inc. shares the power to vote or direct the vote
of the 2,365,239 Shares to which this filing relates.
Cobalt Capital Management Inc. has the sole power to dispose or direct the
disposition of 0 Shares to which this filing relates.
Cobalt Capital Management Inc. shares the power to dispose or direct the
disposition of the 2,365,239 Shares to which this filing relates.
Cobalt Capital Management Inc. specifically disclaims beneficial ownership
in the Shares reported herein except to the extent of his pecuniary interest
therein.
There have not been any transactions since the Schedule 13D filed by the
Reporting Person on August 20, 2008.
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Item 6. Contracts, Arrangements, Understandings or Relationships with Respect
to Securities of the Issuer.
The Reporting Person does not have any contract, arrangement, understanding
or relationship with any person with respect to the Shares.
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Item 7. Material to be Filed as Exhibits.
Exhibit A: Letter to James M. Hansler dated August 27, 2008.
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
August 28, 2008
------------------------------------
(Date)
Cobalt Capital Management Inc.*
By: /s/ Wayne Cooperman
----------------------------------------
Name: Wayne Cooperman
Title: President
* The Reporting Person specifically disclaims beneficial ownership in the Shares
reported herein except to the extent of its pecuniary interests therein.
Attention. Intentional misstatements or omissions of fact constitute federal
criminal violations (see 18 U.S.C. 1001).
SK 01181 0008 915164
Exhibit A
August 27, 2008
James M. Hensler
President/CEO/Chairman
Horsehead Holding Corporation
300 Frankfurt Road
Monaca, PA 15061-2295
Dear Mr. Hensler:
The purpose of this letter is to discuss the opportunities currently available
to stabilize the current earnings and improve the long term prospects of
Horsehead ("ZINC" or the "Company") given the economics of the developing EAF
dust ("EAFD") recycling business, existing market conditions for zinc, your
current market capitalization and your meaningful liquidity position as of
06/30/08. Specifically, at June 30, 2008, the Company has $68m in cash on hand,
zero debt, $60m in availability on the revolver and a hedged zinc position for
the coming 18 months. We have 50% of our market cap available to us in net
liquidity at the current time. As owners of approximately 7% of your outstanding
shares, we strongly believe that shareholders would be well served by the
initiation and implementation of a meaningful (>30% of the Company over the
coming 12-18 months) share repurchase to ensure that we take full advantage of
all opportunities available to us.
The following are suggestions to improve shareholder value that should be
addressed immediately in our opinion.
I. Assess the stand-alone economic merit of smelting secondary material.
Consider re-structuring these purchases with more future flexibility in contract
pricing as existing contracts roll-off in August and September.
The table below shows our rough assessment of purchased material break-even.
Last
Bear Sale BreakEven
---- ---- ---------
Assumed LME $0.700 $0.812 $0.812
Conversion $0.400 $0.400 $0.400
--------------------------
Gross $0.300 $0.412 $0.412
Margin required 10.0% 10.0% 0.0%
--------------------------
Permissible Cost $0.270 $0.270 $0.371
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% LME 38.57% 45.66% 50.74%
--------------------------------------------
While it's clearly not management's fault that zinc prices have fallen to
current levels, it is management's responsibility to seize the opportunity to
re-configure this business line given the recent developments. In other words,
the model of paying 65-70% of LME for purchased scrap is a leftover from the
days of higher zinc prices. To just break even with $0.40 conversion smelting
costs and 65-70% LME costs requires approximately $0.95 LME zinc at the last
sale. To quote Warren Buffett: "You only learn who has been swimming naked when
the tide goes out." Given we have a scrap purchasing model that is not within
$0.15 of breaking even I think it's safe to say that we are looking pretty naked
at today's LME prices.
Again, we understand that 6 months ago these contracts made economic sense.
However, in today's market conditions it appears clear these processed pounds
are no longer economically justifiable. Rather than hoping for the proverbial
tide to come back in, let's move in haste to grab a swimsuit! There are a number
of alternatives here that could make sense:
o Bob and I have discussed a tolling arrangement many times. This would
essentially pay ZINC a fee to process secondary metal whose fee would
equate to a reasonanable return on Monaca's replacement cost for that
portion of capacity. The supplier can have all the exposure, good and
bad, to the zinc price on this business.
o Forcefully renegotiating the % LME paid with suppliers. Consider all
alternatives available to your suppliers, taking careful account of
working capital considerations as well, and lower the % paid here
aggressively to 50% LME at most. Research reports suggest at
$300-325/ton treatment charges, integrated smelters are buying
concentrate for less than $0.50/lb of zinc contained from the miners.
Doesn't this equate roughly to 50% LME excluding freight?
o If this business can not be re-cut to be economically compelling for
the Company, exit the purchased feed program all together. Is there
any negative consequence to this decision?
Simply asked do we need to be in this business if there isn't a stand-alone
compelling return on invested capital? What is the break-even point for a
compelling return and what are the avenues available to us if the break-even
point is meaningfully higher than prompt zinc? Is the return on invested capital
for this stand-alone business (e.g. assuming we processed secondary material
only) sufficient to justify existing processing volumes? Are the barriers to
re-entry in this business truly that daunting if we decide to exit based on
market conditions? What does US Zinc receive under their alternative outlets in
selling their scrap metal?
II. Critically evaluate the economics and vision of a purely "integrated" model
-- smelting only material originating from one of the Company's recycling
operations
We are attracted to the integrated business of recycling EAF dust ("EAFD")
because we believe in longer-term growth in domestic EAF volumes (e.g. more
dust), because we have listened to many favorable reviews of ZINC operations
from dust suppliers and because we like the resultant low cost production
position in the undersupplied US zinc market. Indeed, our numbers, while based
on estimates, continue to show that purchases of secondary feedstock are
dilutive as the Company generates a greater amount of recurring earnings without
them. Critical to this, however, is an estimate of fixed and variable costs at
the 6 operating furnaces at Monaca. Here are the numbers that support this
assumption - all assuming only recycled material gets processed at Monaca.
Monaca has 7 furnaces, one of which is typically being relined to keep all in
good working order. Our understanding from our visit to Monaca is that the
Company is able to simply and economically idle the furnaces that have
historically been fed by purchased scrap. In conversations with Bob, he has
mentioned that total smelting and refining costs will be roughly $135m in 2008,
with roughly $14m of this number attributable to the refinery. In other words,
if we shrink production from Monaca to 210m lbs of zinc contained from 310m lbs,
what costs can be subsequently removed from the $120m of smelting costs?
Our thoughts:
COST MEASURES
--------------
Total Lbs closed 105.2
Tons closed 52.6
Tons Coke/Ton Zn 0.7
Nut Coke saved 36.8
Price $200.00
------------
Savings $7.4
Mwh/Ton Zn 3.5
Mwh saved 184.1
Price $50.00
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Savings $9.2
Tons Capacity 155
Est'd Man Hrs -
Monaca 1096
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Man Hours/Ton 7.07
Reduction in
hours 371.9
Assumed Per
Hour $15.00
------------
Savings $5.6
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TOTAL $22.1
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In other words, of the total $120m of smelting costs, we should be able to
reduce costs by at least $22m on variable costs alone. I believe this would free
up cash from working capital for the time being as well. Are the $35m in cost
reduction measures discussed on the Q2 earnings call additional opportunity? Is
this all? In other words at last sale LME, does running 4 furnaces (idling 1)
instead of 6 could make good economic sense? It seems very plausible that at
$0.75 LME the Company makes more money processing only recycled material,
running 4 furnaces for PW zinc and running the refinery to full capacity. Why
continually depreciate our assets only to produce cash burning secondary metal?
We'd like to discuss this in detail.
Additionally we'd like to better understand the opportunity to purchase
additional recycling capacity at distressed prices during this trying time for
the zinc industry.
III. Immediately revisit the resistance to debt on the balance sheet. Share
repurchase and expansion/ tuck-in acquisitions are not mutually exclusive given
the Company's liquidity position.
As stated above, we are attracted to the integrated business of recycling EAF
dust and fully expect to become more integrated in this respect over time.
However, it's impossible to overlook the valuation of the assets that we know
best - our own. For example, consider that the Company is preparing to spend
$85m to greenfield new recycling capacity of 160,000 tons of dust recycling in
the Carolinas to capitalize on 3 Nucor EAF's - a move we support. This price
equates to about $530/ton of recycling capacity. If this is attributed to our
existing owned recycling network of 580,000 tons, we would assume that ZINC's
value is at least $325m ($9.20/share) due to its recycling capacity alone.
Additionally, we use about $625/ton of replacement value for our smelter (this
would require a $62/ton EBIT or $0.03 per pound to earn a return which seems
reasonable). This values our remaining assets (refinery, power plant assets,
potential for profitable iron sales, etc.) at $0 which should be conservative to
the point of being ridiculous.
See below example.
Per ton value $531.25
Horsehead Recycling 580.0
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Recycling value $308.1
Smelting Capacity 150.0
Smelting replacement $1,250.0
Haircut 50.0%
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Value $93.8
Distressed Asset Value $401.9
Market Capitalization $245.4
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% Upside 61%
We believe the asset value of the business to be worth far more than the above
example and on a cash adjusted market capitalization basis the discount is even
more compelling. However, even in this highly marked down assessment there is no
plausible excuse for not aggressively repurchasing shares in our opinion. In
keeping with the logic of the above distressed analysis, each $1.00 of stock
that we repurchase at the last sale valuation immediately creates more than
$0.60 of value for shareholders with little risk. Our internal numbers
demonstrate that a sufficiently solid liquidity cushion is available to support
the suggested repurchase initiative.
On the Q2 earnings call, the Company discussed 175,000 tons of iron that we're
currently essentially giving away to the aggregates industry. Our preliminary
assessment of PIZO implies that the Company could install new submerged electric
arc technology that could realize meaningful returns due to enhanced recovery of
the value in the EAFD - in this case the iron units. If EAFD is 20% zinc, 35%
iron and 45% other and we're currently giving away nearly 200,000 tons of
valuable material shouldn't we immediately fix this in conjunction with buying
back as many of our own shares as possible? Thinking even more simply, you
stated that we have a $35m cost reduction program on the Q2 call. The market
capitalization of the entire Company today is less than 11x the taxed value of
these cost reductions alone. All of this ignores the option value that someday
zinc might stop going down! The value and the liquidity are there - management
and the Board need to take advantage of this opportunity and aggressively
repurchase shares.
The defense of avoiding share repurchase has been concern over liquidity and
possible continued declines in the zinc price. Our analysis concludes that the
recycling capital investment requires $0.60 to make money. In other words, we're
already making zinc assumptions in approving our capital allocation program. In
a "scorched earth" scenario, no strategic positioning is going to rescue the
Company if demand for zinc vanishes and the top half of the global zinc
production curve hemorrhages money for years. As such, our capital budget is
already making implied zinc price assumptions in its forward budget and
shareholders who support the vision for the Company deserve to be rewarded by
greater ownership of our assets at distressed prices. If our stock is not worth
repurchasing at $7.00/share, our actions clearly suggest that an orderly sale of
the Company is worth considering.
Simply put - we're fortunate enough to have a hedged business for 18 months and
plenty of liquidity. Let's work feverishly to put that liquidity to work in the
highest return opportunities to ensure our business value per share is
consistently getting greater than the day before.
CONCLUSION: The optimal deployment of capital requires objective analysis. Like
you, we are not looking to make a quick buck and move on. Rather we are
interested in making decisions that, on a risk-adjusted basis, are in the best
interests of Horsehead shareholders. Towards that end, we summarize some of the
Company's options for deployment of its meaningful liquidity. Clearly, these
represent an outsider's view and are therefore likely incomplete.
Option Benefit Drawback
------ ------- --------
Organically grow o Leverage Monaca o Relies on zinc prices
recycling capacity capacity above $0.60 per share to
o Grow EAFD recycling realize a return
market share o Cost structure becomes
more fixed
Strategic recycling o Leverage Monaca o Relies on zinc prices
acquisitions capacity above $0.60 per share to
o Grow EAFD recycling realize a return
market share o Cost structure becomes
o Remove competitors more fixed
o Integration risk
o Distraction
Share repurchase o Buy assets that you o Opportunity cost vs.
know perfectly other alternatives
o Demonstration of
mgmt. confidence in the
business
o Riskless
The critical takeaway is that a meaningful (at least 30% over 12-18 months)
share repurchase plan in no way hinders the other options and offers a highly
compelling return. As stated earlier, the Company enjoys a significant liquidity
position along side of hedged zinc for the coming 18 months. The Company could
easily repurchase shares in the market immediately with cash on hand that is
earning less than 2% and patiently debt finance the Carolinas project by
assuming less than 2.0x leverage on a depressed EBITDA. Our numbers and hedge
assumptions comfortably support this strategy even in dire LME price scenarios
and we would welcome the opportunity to discuss them with you further. As the
share repurchase window can close quickly, it is critical to move decisively
when there is opportunity to buy your own assets at attractive prices.
We understand the decline in the LME zinc price has been swift - surprisingly
so. That said, we need to be clear that we expect this letter to be taken
seriously by the Company and its Board of Directors and that we would view a
passive approach to current market conditions as unacceptable. We believe there
is tremendous value in the Horsehead assets and we are committed to ensuring
this value is pursued aggressively. We hope this letter summarizes our opinion
as partial owners and immediately opens the above suggestions to fruitful
discussion. If the Company disagrees with the analysis and conclusions above, we
ask at a minimum for detailed explanations in support of the disagreement. We
would greatly appreciate the opportunity to discuss this letter in greater
detail at your earliest convenience.
Sincerely,
Samuel F. Martini
Analyst, Cobalt Capital
Wayne Cooperman
President, Cobalt Capital
Copies to:
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Jack W. Schilling
T. Grant John
John C. Van Roden, Jr.
Bryan D. Rosenberger
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